Resolve to stay one step ahead of the taxman

National Post


Looking to start the tax year off on the right foot? Here are some quick tips to kick off a year of tax savings opportunities.

Resolution 1 Maximize RRSP contributions.

The new RRSP limit for 2008 is the lesser of 18% of last year's earned income and $20,000. January is a great time to get a head start on your 2008 contributions -- especially if you receive your 2007 bonus this month.

Resolution 2 Invest outside of an RRSP.

Investing in shares of multi-class mutual fund corporations (where each class of shares represents a different fund) allows investors to switch from one class of shares to another without incurring any immediate capital gains tax.

Resolution 3 Open up RESPs for (grand)kids.

Registered Education Savings Plans are now better than ever considering the annual contribution limit was eliminated in last year's federal budget and the lifetime contribution maximum increased to $50,000 per beneficiary. With the basic Canada Education Savings Grant (CESG) enhanced to 20% of the first $2,500 of annual contributions per beneficiary, RESPs are the way to go when saving for kids' higher education.

Resolution 4 Consider opening an RDSP.

If you or a family member is disabled, consider starting a Registered Disability Savings Plan. These plans, modelled after the RESPs, not only allow you to save on a tax-deferred basis for a disabled person, but also provide generous government grants through the new Canada Disability Savings Grant program.

Resolution 5 Revisit Canadian dividends.

Canadian dividends received from stocks of publicly traded companies (or indirectly through funds that own such stocks) receive very favourable tax treatment in most provinces, making them potentially even more attractive than capital gains, depending upon where you live.

Resolution 6 Make your interest tax deductible.

Still carrying a mortgage but also investing outside your RRSP? Consider a debt-swap strategy by selling your nonregistered investments (subject to any capital gain/loss considerations), paying off the mortgage (again, subject to any early payment penalties) and then getting a secured line of credit against your home to repurchase the securities sold. By doing so, you can make your otherwise non-deductible interest tax-deductible. But be forewarned -- the Supreme Court of Canada is set to hear a case involving a similar strategy this spring.

Resolution 7 Consider income splitting.

The prescribed interest rate for the first quarter of 2008 has dropped to 4%. A spousal loan income-splitting strategy, whereby the higher income spouse or partner loans funds to the lower income partner to invest, may be ideal given the new, lower prescribed rate required to be charged on such loans.

Resolution 8 Consider a tax-efficient cash flow plan.

Looking for tax-effective cash flow from your mutual funds? Consider either setting up a Systematic Withdrawal Plan (SWP) which allows you to receive regular, tax-efficient cash flow from your funds, or investing in a T-Series fund, which pays out tax-efficient distributions, a portion of which may be considered tax-deferred return of capital.

Resolution 9 Donate "in-kind" to charity.

Consider donating appreciated funds or stock (especially those Bell Canada shares set to disappear) directly to the charities of your choice in 2008. Not only will you get a tax receipt for their fair market value, but you'll pay no tax whatsoever on those accrued gains, no matter how long you've held those funds or shares.

Resolution 10 Plan now not to get a tax refund.

Finally, some recurring advice: If you generally get a whopping tax refund each spring, consider applying to the CRA for a reduction of tax withheld at source by your employer. Since CRA's Form T1213 needs to be completed each year, January is an ideal time to begin the process anew.